Stability is the target
GDP fell -6.8% y/y after the Chinese economy was hit hard by the coronavirus in Q1. Since the virus in China has been almost contained since March, economic activities have been gradually rebounding, and there have been clear signs of recovery. Industrial output was down -1.1% y/y, up 12.4 pps from January-February.
Consumption has been hardest hit, largely due to quarantining. Retail sales of social consumption goods fell -19% y/y in Q1, and -15.8% y/y in March, up 4.7 pps from January-February.
Trade has so far been largely unaffected. Exports in March were up 2.8% y/y after adjustment, down only 1.4 pps from Q4 2019. Imports were up 2.4% y/y, down 2.8 pps. FDI, RMB and foreign reserves seem to be relatively stable as well, signaling investors’ positive confidence, largely attributable to China’s efficient handling of the pandemic outbreak despite an increase in global uncertainty.
Fixed asset investment has been left as the only major factor keeping the economy afloat, due to future weakening overseas demand, and of domestic consumption demand. Investment had not recovered to normal levels by March, falling -9.5% y/y, up 15 pps from January-February. The fiscal deficit is rising, with fiscal revenue falling -14.3% y/y, putting future constraints on the fiscal expansion scale.
CPI eventually fell, and was up 4.3% y/y in March, down 1 pps from January-February. The ex-factory price index of industrial goods was down -1.5% y/y. PPI fell -1.6% y/y. Major financial indicators are the only ones not negatively impacted. M2 rose 10.1% y/y, and M1 rose 5% y/y, up 1.4 and 0.2 pps respectively from the previous month.
President Xi Jinping chaired a major meeting of the Politburo on April 17th, where he promised to intensify policies to achieve the country’s goal of “six stabilities:” stable employment, trade, financial markets, investment, foreign capital and expectations, on the condition that the virus has been effectively controlled. We believe there will be expansionary monetary and fiscal policies, such as interest rate cuts and accelerated infrastructure construction, but not a mass flooding to the market, per the approach of the Fed. Unlike in other major economies, China has been saving for a rainy day to make these policies feasible, with its still-sizable gap with a zero interest rate, relatively low central government debt, and big state-controlled economy -- meaning non-cyclical unemployment, its implicit social security system in which unemployed migrant workers still possess agricultural lands, and a high household saving rate.
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